Combating Corruption in International Business: The Big Questions

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Working Paper
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Combating Corruption in International Business: The Big
Questions
David Hess
Stephen M. Ross School of Business
University of Michigan
Ross School of Business Working Paper
Working Paper No. 1285
August 2015
Ohio North University Law Review, Forthcoming
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Electronic copy available at: http://ssrn.com/abstract=26491211 COMBATING CORRUPTION IN INTERNATIONAL BUSINESS: THE BIG QUESTIONS David HessAssociate Professor of Business Law & Business EthicsStephen M. Ross School of BusinessUniversity of MichiganAnn Arbor, MI [e-mail] This essay is based on remarks given at a 2014 symposium on the ForeignCorrupt Practices Act hosted by the Ohio Northern University Law Review. A revisedversion is forthcoming in the Ohio Northern University Law Review.

Electronic copy available at: http://ssrn.com/abstract=26491212 COMBATING CORRUPTION IN INTERNATIONAL BUSINESS: THE BIG QUESTIONS DAVID HESS* I. IntroductionThe last several years have seen a significant rise in the efforts of governments tocombat the supply side of corruption. The United States has led the way with criminalenforcement actions under the Foreign Corrupt Practices Act (hereinafter “FCPA”), andother nations are now showing signs that they will increase the enforcement of their anti-bribery laws as well.1 Due to these increased efforts, now is an important time to asksome of the big questions in combating corruption.2 By “big,” I do not mean the mostpressing or controversial questions. Instead, I mean those questions that cause us to takea step back from current FCPA debates and think about what the FCPA—and othersimilar anti-bribery laws—should be trying to accomplish in changing corporatebehavior. In short, my big questions relate to understanding why corporations pay bribes,what corporations need to do to stop paying bribes (which is not as simple as some mayassume), and how to encourage corporations to actively fight corruption (that is, tocombat corruption beyond their organizational boundaries).There are, of course, many different perspectives one could take when answeringthese questions. In this essay, I consider these questions from the perspectives ofbusiness ethics and corporate social responsibility. Here, I am using the term “businessethics” to refer to both ethical decision making by individuals and the exercise of ethicalleadership by management, which is managing the organizational context within which * Associate Professor of Business Law & Business Ethics, Ross School of Business, University ofMichigan.1 TRACE INTERNATIONAL, GLOBAL ENFORCEMENT REPORT (GER) 2013 4, 7-8 (2014), available athttp://www.traceinternational.org/wp-content/uploads/2014/09/TRACE-Global-Enforcement-Report-GER-2013.pdf.2 The use of the phrase of “big questions” in this context is inspired by my colleague Steve Salbu’s use ofthe term. See Steven R. Salbu, Transnational Bribery: The Big Questions, 21 NW. J. INT’L. L. & BUS. 435,437 (2001). For my reply to some of the “big questions” raised by Salbu, see Thomas W. Dunfee & DavidHess, Getting from Salbu to the 'Tipping Point': The Role of Corporate Action Within a Portfolio of Anti-Corruption Strategies, 21 NW. J. INT'L L. & BUS. 471 (2001).

3individuals engage in ethical decision making.3 By corporate social responsibility, I amreferring to the obligations corporations have to society beyond just following the law.4The next section addresses the first question: why do corporations pay bribes?This leads to two additional questions: why do employees pay bribes, and when arecompliance and ethics programs effective in preventing the payment of bribes? The nextbig question focuses on issues of corporate social responsibility: what should acorporation do to combat corruption? That is, is it sufficient for a corporation to simplyensure that its employees do not pay bribes, or should the corporation do somethingmore? II. Why do Corporations Pay Bribes?Generally stated, the literature on combating corruption (and corporate crimemore generally) tends to take two views of bribe-paying corporations. First, there is theview that the corporation is the rational profit-maximizer.5 This corporation makes thedecision to pay bribes to win business because the benefits of the new (or continued)business outweigh the risks of getting caught paying a bribe and the expected penalty ifthe corporation does get caught.6 The role of the government is to set penalties at theright level to encourage corporations to resist the temptation to pay a bribe.7 Under thisview, the corporation is generally viewed as a “black box.” This view does not look atthe motivations of individuals within the corporation, but views the corporation asresponding to external incentives in a rational, calculated manner.8 In short, corporationsare viewed as following the law only if the consequences are sufficiently negative, asopposed to following the law due to a sense of obligation.9At first glance, company like Siemens appears to be an example of this view.Before it paid over $1.5 billion in fines in 2008 for paying bribes, the use of bribery at 3 A Government Accountability Office report defined business ethics as:Business actions addressing the CSR concern of business ethics involvevalues such as fairness, honesty, trust and compliance, internal rules, andlegal requirements. Among the actions taken to address business ethicsare incorporating ethics into corporate value and mission statements,developing ethics codes, conducting ethics training, and monitoring ethicalperformance.U.S. GOVERNMENT ACCOUNTABILITY OFFICE, GLOBALIZATION: NUMEROUS FEDERAL ACTIVITIESCOMPLEMENT U.S. BUSINESS'S GLOBAL CORPORATE SOCIAL RESPONSIBILITY EFFORTS 8 (2005),available at http://www.gao.gov/new.items/d05744.pdf.4 See id. at 5-6. A Government Accountability Report defined CSR as: “in addition to addressing theinterests of its shareholders, business should address the interests of its other stakeholders, includingcustomers, employees, suppliers, and the local community.” Id. at 5.5 Timothy F. Malloy, Regulation, Compliance and the Firm, 76 TEMP. L. REV. 451, 453 (2003).6 Peter May would refer to this type of motivation as a “negative” motivation. Peter J. May, ComplianceMotivations: Affirmative and Negative Bases, 38 LAW & SOC'Y REV. 41, 41-42 (2004). A negativemotivation to comply with the law is based on “fears of the consequences of being found in violation ofregulatory requirements.” Id. at 42. An “affirmative” motivation, on the other hand is not based oncoercion, but “good intentions and a sense of obligation to comply.” Id.7 See Malloy, supra note 5, at 453-54.8 See id. at 498-99 n.208.9 May, supra note 6, at 42.